EARLY STAGE FINANCING OF RTO SPIN-OFF COMPANIES
Michaël A Bikard Edited by: Elena Andonova Sergio Grande Alessandro Fazio
2019
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JRC116458
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Contents
1 Executive Summary ....................................................................................... 5
2 Welcome Addresses ....................................................................................... 6
3 Panel I. Best practices session on Proofs of Concept (PoC) and Start-up funding ....... 7
4 Panel II. Spin-off companies and fund managers ................................................. 9
5 Panel III. What comes next: Updates from EU institutions ................................... 11
6 Concluding roundtable .................................................................................. 13
7 Policy recommendations ............................................................................... 14
8 Conclusion.................................................................................................. 15
9 Annex - Agenda........................................................................................... 16
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Authors
Michaël A Bikard1, rapporteur
Edited by Elena Andonova, Alessandro Fazio and Sergio Grande2
1 INSEAD, Institut Européen d'Administration des Affaires 2 Joint Research Centre
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1 Executive Summary
The exploitation of academic science by firms in general and by entrepreneurs in
particular can create tremendous value for the economy. Companies such as Alphabet or
Genentech have their origin in academic labs. In their vast majority, recent
commercialization success stories are not European. This is not an accident. There are
still considerable barriers to commercializing science in the EU. This workshop brought
together technology transfer experts, entrepreneurs, investors, and policy-makers to
discuss those barriers, share best practices, and outline potential solutions. The focus of
this workshop was specifically on the financing of RTO (research and technology
organizations) spinoff companies.
In particular, the presentations and discussions focused on three main questions:
• What are the best practices when it comes to the incubation and launch of
RTO spinoff companies?
• What are some of the key issues regarding funding and what are the current
solutions?
• What are the policy initiatives that are meant to address this issue and how
could they be improved?
These three questions where at the core of three different panel sessions respectively
focusing on:
• Panel I. Best practices session on proofs of concept and start -up funding
• Panel II. Spin-off companies and fund managers
• Panel III. What comes next: updates from EU institutions
The workshop’s main conclusions were the following:
1) RTO spin-offs face considerable challenges in attracting sufficient funding.
Those projects are generally too risky for private investment, and European
start-ups often fail in the “valley of death.” Those that do not fail must often
face better-funded competitors from the US or from China.
2) Over the past few years, considerable progress was made to develop so-called
“technology transfer funds” and other policies to facilitate access to funding for
innovative start-ups based in the EU.
3) However, RTO spin-offs still face considerable challenges. Not only is funding
often insufficient, but there are also often other bottlenecks such as the lack of
skills, knowledge, and general infrastructure to accompany entrepreneurs in
the commercialization process.
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2 Welcome Addresses
Giancarlo Caratti, Head of Unit Intellectual Property and Technology Transfer at the
European Commission’s Joint Research Centre, explained in his opening remarks that the
European TTO Circle’s goal is foster innovation by becoming the single contact point for
expertise in technology transfer at the European Commission. The TTO Circle is a
growing network of 33 large research and technology organizations (RTOs) which amount
to over 200 000 people, 35 000 patents, 4 000 start -ups and 5 000 software projects.
Successful technology transfer requires knowledge, people, skills, but also money. The
goal of this workshop is to explore issues relating to the early stage financing of RTO
spin-off companies.
Hans Boumans, Head of Technology Transfer at the Netherlands’ Organization for
Applied Scientific Research (TNO) reminded the audience that the TTO Circle had been
formally created in 2011 by Caratti and his team. He announced that the goal of the
workshop was twofold. First, it was about exchanging best practices. Second, it was
about strengthening the relationship between RTOs and European institutions. He then
discussed how the lessons that he learned through the TTO Circle and the support from
the European Investment Fund have helped him increase the performance—and decrease
the cost— of the technology transfer activities at TNO.
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3 Panel I. Best practices session on Proofs of Concept (PoC)
and Start-up funding
The first panel of the day was composed of technology transfer professionals. They
broadly emphasized that the commercialization of academic findings does not occur in a
vacuum. Instead, an infrastructure is necessary to facilitate this process. The
infrastructure takes different shapes at different institutions, but it generally includes
support mechanisms to help entrepreneur by providing expertise (e.g., legal,
management) and funding, as well as a pruning mechanism to avoid wasting time and
resources on ideas that are not progressing well.
The first presenter of this panel was Neta Pessah, the project manager of the IDEA
(Innovations, Development, Enhancement, and Acceleration) department at Yeda R&D,
the commercial arm of the Weizmann Institute of Science in Rehovot, Israel. Established
in 1934, the Weizmann Institute has become an innovation powerhouse boasting the
highest commercialization income per researcher worldwide. The 2014-started IDEA
Program is an effort to expand further the commercialization capabilities of the Institute.
IDEA provides a structure through which promising projects emerging at Weizmann are
taken out of academia and developed within an industrial setting. The program includes
specific milestones, deliverables, go/no go decisions, well-defined budgets, and quarterly
reports. More than 25 projects went through the IDEA program, primarily in the life
sciences. The program’s budget is about $1 million per year.
Sylvain Colomb was the second presenter. He is in charge of developing startup
processes at CEA (Commissariat à l'énergie atomique et aux énergies alternative) in
Grenoble, France, and he highlighted the crucial role that startups play in the CEA’s
technology transfer strategy. CEA spins out about 10 startups per year in various
domains including software & systems, microelectronics & microsystems, biotech &
healthcare, and new technology for energy. He noted that over 90% of those spin-offs of
still alive after five years. CEA has a four-step process to support startup creation
including an awareness phase, a maturation phase, an incubation phase, and a seed
phase. Through this process, the teams leading those projects receive training, financial
support, and the relevant expertise to further develop their commercialization idea.
Colomb also emphasized the existence of a strong momentum in favor of deep tech in
France, which includes numerous public and private initiatives.
The panel’s third presenter was Johan Haspeslagh, senior venture development
manager at the Institut de microélectronique et composants (IMEC) whose headquarter
is in Leuven, Belgium. IMEC is a world-leading R&D and innovation hub in
nanoelectronics and digital technology. It offers various platforms, services, and
venturing options to support the process of commercialization. Its focus is on high
margin, application-oriented businesses such as the sale of drone-collected data to
farmers. IMEC’s process to spin out companies is organized in five steps including a call
for idea, an enrichment phase, a “venture timebox” to validate the business case, an
incubation phase, and a spin-off phase. On average, each call for idea attracts 25-40
ideas, but high attrition in the development process means that 12-16 ideas make it the
enrichment phase, 3-4 to the venture timebox, and only 1 to the incubation phase. IMEC
offers each commercialization project a number of funding opportunities at every stage of
project maturity.
Rolph Segers, technology transfer officer at TNO in the Netherlands was the panel’s
fourth speaker. He described some of the limitations of venture capital investment in
technology transfer and particularly highlighted the challenges that innovators face when
they attempt to secure funding to build a proof of concept . To address this issue, a
consortium of universities in the Netherlands including Delft University of Technology,
Erasmus University Rotterdam, Leiden University, TNO and others, have launched an
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investment fund called UNIIQ. UNIIQ provides €300 000 convertible loans. Its
investment committee is composed of technological experts, market experts, and
investors. The program’s main weakness is the absence of safeguards. However, one
crucial advantage of UNIIQ is that it is not subject to traditional technology transfer
politics.
The fifth and last speaker for this first panel was Javier Extable Oria of the Deputy
Vice-Presidency for Knowledge Transfer at the Spanish National Research Council (CSIC).
CSIC is a large research organization including 11 085 people and a budget of €737
Million. It is also the top Spanish applicant for European patents. Extable Oria also noted
that the development of proofs of concepts from academic science is very difficult to
fund. Those projects are typically ineligible for tradit ional public research grants and at
the same time too risky for VC investment. To address this issue, the Spanish
government set up Technology Transfer Funds such as the 2016-founded INNVIERTE and
the 2018-founded Fond-ICO Global. Those funds complement more traditional public or
private calls for proof of concept projects. They are not limited to specific dates or
technological areas, but they do require the establishment of a spin-off. More generally,
Extable Oria emphasized the importance of proactive identification of new technologies
from academia and of early collaboration with third parties to explore various funding
options for early-stage projects.
This panel ended with an open discussion led by Asier Rufino, CEO of Tecnalia Ventures,
who was also the panel’s moderator. During this discussion, workshop participants
highlighted the importance of securing an in-house budget from the academic institution
to support early-stage technology development. Others also discussed the importance of
building an ecosystem not only to identify potential licensees, but also to be able to
connect innovators with relevant experts and potential team members and partners.
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4 Panel II. Spin-off companies and fund managers
The second panel of the day focused on the funding challenges that entrepreneurial firms
face when seeking to commercialize academic research. There was a general consensus
that a “valley of death” exists where many startups fail because their projects are too
commercial to be eligible for academic grants but also too risky to be interesting for
venture capitalists or business angels. To address this issue, some academic institutions
and governments have created technology transfer funds, which aim at filling that gap.
This panel brought together individuals who have experienced this issue both from the
funding side as well as from the entrepreneurial side. Lluc Diaz, Innovation and Venture
Officer at the European Space Agency moderated it.
The first speaker was Jörg Wamser, Managing Director at Fraunhofer Technology
Transfer Funds GmbH (FTTF). FTTF is Germany’s first tech-transfer fund and it is
operational since January 2019. The fund consists of €60 million, half of which stems
from the European Investment Fund, and the other half from the Fraunhofer
Gesellschaft. It exclusively invests in Fraunhofer spin-offs and licensing projects and
focuses on pre-seed and acceleration. Fraunhofer is the largest organization for applied
research in Europe, including 72 institutes, 25 000 employees, and an annual budget of
€2.3 billion. Wamser noted that Germany is weak when it comes to early stage VC
investment with 2016 per capita investment of only $6.21 against $35 for Ireland and
over $80 for the US or Israel. FTTF aims at bridging the gap between academia and
industry by providing about 12 months of runway with a focus on acceleration.
Fraunhofer is trying to emulate the success of institutions like MIT or ETH Zürich. FTTF
plans to invest in 35 projects at the pre-seed stage (about €250 000 per investment)
over 5-6 years. Those investments will be made as convertible loans with standardized
conditions and legal documents.
Michael Brandkamp, CEO of High-Tech Gründerfonds (HTGF), was the panel’s second
speaker. HTGF aims at accelerating innovation by investing in high tech startups. HTGF
III was founded in 2017. It consists of €316.5 million, including €106.5 million stemming
from business investors. The fund focuses on young firms (less than 3 years old) and
invests up to €3 million per firm. It adds value not only by providing financial support,
but also by offering hands-on operational support from experts through a large network.
Overall, HTGF Funds I-III have invested €892.5 million through 1 958 transactions with
527 technology firms. There have already been 101 exits. Portfolio companies have
raised over €2 billion from third party sources in follow-on financing rounds. Brandkamp
discussed some of the IP-related issues that often emerge during the due diligence
process, but he also pointed to the fact that valuations and VC investments in Europe are
growing and that business angels are becoming more professional.
The third panel speaker was Emanuele Occhipinti, Vice President at Greenrail.
Greenrail is an Italian startup founded in 2012, which set out to reinvent railway sleepers
by creating smart sleepers out of secondary waste material. Greenrail’s addressable
market is huge and their technology is protected by patents. They have raised almost €5
million from various public and private sources. However, they find it challenging to raise
larger amounts to fund their expansion because they feel that they have become too big
for most venture capitalists in Europe.
Lluís Chico Roca, CEO at Neos Surgery, was the panel’s fourth and last speaker. Neos
create, produce, and sell new solutions for surgical implants. The Spanish firm was
founded in 2003 as a spin-off from two private R&D centers in Spain, eureca! and
tecnalia. They began international expansion in 2013 through alliances with sales
partners in the US and China. So far, their sales amount to €7 million and they have
been EBITDA-positive since 2011. They have received €1.1 million in investment in 2018.
The worldwide addressable market in their segment is very large but they are competing
against an American firm named Intrinsic Therapeutic which has raised $49 million and
has already been granted FDA approval. They feel that VC investors in the EU remain
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more risk-averse than in the US and in China, and that this constitutes a significant
competitive disadvantage.
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5 Panel III. What comes next: Updates from EU institutions
The third panel of the day highlighted the different initiatives undertaken by European
institutions and aiming at boosting the financing of innovation in the EU. The speakers
discussed in particular three initiatives, namely the Capital Market Union, the European
Investment Fund, and the European Innovation Council. In addition, the Directorate-
General Joint Research Centre conducts research to evaluate the efficacy of different
policy instruments.
The first speaker of the third panel was Amaury Chazeau-Guibert who is Policy Officer
at the Directorate-General for Financial Stability, Financial Services and Capital Markets
Union, European Commission. Chazeau-Guibert highlighted that the Capital Market Union
(CMU) is a key EU policy objective aiming at diversifying the funding of the EU economy,
reducing over-dependence on bank loans. The CMU attempts to address a number of
challenges including the future departure of the UK from the Single Market, uneven
standards of supervision and enforcements across countries, the diversity of capital
markets across Europe, the transformation of capital markets by the fintech industry,
Europe’s environmental and soc ial challenges, as well as the challenges set out in CMU
Action Plan. As a result of the CMU, SMEs’ access to finance should improve through a
series of measures enhancing awareness and financial education while boosting
crowdfunding, VC investment, and the market for IPOs.
Next, Jerome Samson, Investment Manager at the European Investment Fund (EIF),
presented the EIF. The fund provides risk financing to stimulate entrepreneurship and
innovation in Europe. It offers various products ranging from venture capital to
guarantees and microfinance by working with financial intermediaries across the EU-28
and EFTA countries, candidate and potential candidate countries. The EIF helps European
SMEs through equity and debt products at every stage of their development . In
particular, Technology Transfer Funds are necessary to bridge the gap between research
grants and VC funds. However, Samson argued that technology transfer is underfunded
in Europe since it corresponds to less than 0.2% of the EU28 yearly public R&D funding
(over €100 billion). Between 2006 and 2018, the EIF has invested €770 million in 38
investment vehicles, which had an average size of €46 million. In the next few years, the
EIF plans to optimize the impact of its current tools and to develop new and
complementary tools.
The panel’s third speaker was Ramona Samson, Deputy Head of Unit, Investments and
SMEs at the Directorate-General for Research and Innovation, European Commission.
She described the European Innovation Council (EIC) and its goal to make Europe the
global leader in innovation. She noted that there is a lack of private finance for
innovators and scale-ups in Europe, which Deloitte (2016) estimated at about €70 billion.
The EIC Pathfinder and Accelerator are two complementary funding programs that aim to
fill this gap. Horizon 2020 (2018-2020) includes €2.7 billion for EIC pilot, but €10 billion
have been proposed for EIC in Horizon Europe (2021-2027). The EIC Pathfinder consists
of a one-off grant to support future and emerging breakthrough technologies, while the
EIC Accelerator provides blended finance (grants plus loan/equity) of up to €15 million or
more.
The fourth and last speaker of this panel was Blagoy Stamenov, Policy analyst,
Knowledge for Finance, Innovation and Growth, at the Directorate-General Joint Research
Centre (JRC), European Commission. Stamenov described the JRC B.7 work on high-
growth innovative companies, which aims at promoting the creation and scaling of high-
growth innovative firms in Europe. So far, the group has analyzed policy instruments for
improving access to finance and their effectiveness. They have already published reports
on equity, direct R&D grants, and R&D tax incentives, and are currently investigating the
role of venture capital in Europe. Stamenov noted that in 2017, the UK largely dominated
the VC investment landscape in Europe. Besides, he also presented various descriptive
statistics about VC investment in France.
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Following those presentations, the workshop attendants discussed several topics in a
conversation led by the session’s moderator, Alessandro Fazio, Head of Competence
Centre on Technology Transfer at the Directorate-General Joint Research Centre,
European Commission. The first question was about whether the EIF complements or
competes against private sector investment, and Samson responded to this question by
pointing to the fact that the EIF is careful not to compete and that they sometimes
decrease the amount that they invest to leave room for private investors. He also noted
that support by the EIF has a strong positive impact on follow-on investments. Another
attendant asked whether the gap between the EU and the US and China is still growing
or whether EU improvement means that the gap is closing. Fazio responded to this
question by highlighting that the gap that used to exist between the EU and the US at
the seed stage has been closing, but that a large gap seems to be widening when it
comes to late stage investment. Samson also discussed anecdotal evidence that the
return on VC investment in the EU has been growing and that it might have overtaken
that of the US. Finally, several attendants discussed the EIF’s potentially conflicting goals
to deliver a return on investment while at the same time investing in Europe’s less
innovative countries, especially in the East.
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6 Concluding roundtable
The last roundtable of the day was moderated by Elena Andonova, Technology Transfer
Officer responsible for Financial Instruments at the Directorate-General Joint Research
Centre, European Commission. This roundtable was an opportunity for many of the
participants to react to the presentations and to exchange about the challenges that they
have faced when managing with the commercialization of academic science.
Asier Rufino, CEO of Tecnalia Ventures noted that we talked a lot about financing, but
that growth is not only about money. It is also about skills and expertise. Many investors
in Europe have limited entrepreneurial experience and they do not understand what it
takes to grow a startup. He further discussed the fact that venture capital and private
equity require very different skills because successful venture capitalists must actively
help entrepreneurs. Yet, many VC investors in Europe have a private equity background,
and their approach might therefore hurt startups.
Bart Swaelens, Head of Tech Transfer and Venture Development at VITO agreed with
Rufino, and further added that expertise among European VCs is very spread out
geographically. VC investors tend to specialize narrowly, so the fact that they are so
spread out geographically means that there might often be a mismatch between
entrepreneurial needs and the skills of local VC investors.
Maria Makridaki, Technology Transfer Consultant at PRAXI Network/FORTH discussed
the historical lack of funding for entrepreneurship in Greece. She noted that the fact that
they recently received €200 million from EU funds means that they can start funding
startups. Improving conditions also means that some entrepreneurs are starting to come
back. However, risk-aversion remains an important barrier to academic entrepreneurship
in Greece.
Julia Schmalenberg, Senior Policy Advisor at Fraunhofer noted that there is an
imbalance in EIC’s applications. She also argued that there is an important problem of
lack of integration in Europe and that European frameworks are too nation-focused. In
response to this, Asier noted that European integration can also happen bottom-up
through cross-borders collaborations, though he agreed that Europe should work on
decreasing regulatory obstacles to joint cross-border investments.
Christopher Kerth of the Transfer & Innovation Department at Helmholtz Association
described the work of Helmholtz and its investment in the commercialization process
from R&D to proof-of-concept and spinoff. He further noted that there is a “valley of
death” when it comes to innovation in Germany, especially in the life sciences. This, he
argued, is an important barrier to entrepreneurship.
Lluc Diaz, Innovation and Venture Officer at European Space Agency (ESA) agreed that
Europe has a growth-funding problem. The handoff between public and private
innovation is critical, and he recognized that VC investors cannot be expected to fill that
gap. He also asked why Europe does not have any Elon Musk-type entrepreneurs.
Culture, he believes, might be part of the problem.
Finally, Michaël Bikard, Assistant Professor of Strategy at INSEAD and rapporteur of
this workshop, noted that academic scientists form global networks and that findings
made in Europe are routinely exploited by entrepreneurs in the US or Asia. He argued
that European policy makers should be concerned about this trend because it means that
the economic value created by European investment in Science is being captured by
other countries. To address this issue, Bikard argued that Europe should boost its
commercialization capabilities. In practice, he believes that this cannot be achieved
unless one looks beyond intellectual property and the so-called “valley of death.”
Knowledge flows between industry and academia can be increased by encouraging
university-industry interactions, individual mobility, and the spread of entrepreneurial
and innovation skills among Europe’s engineers and natural scientists.
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7 Policy recommendations
The workshop’s conversations provided the basis for the following policy
recommendations.
1. Help entrepreneurs cross the “valley of death”
Considering the risk involved in commercializing academic research, private investors
and entrepreneurs need public support. Academic research is funded via research grants,
and private investors (e.g., business angels, venture capitalists) invests in startups
presenting limited risk. Between the two, however, a valley of death exists in which large
numbers of startups fail. Academic ventures will not attract private investment unless
much de-risking is done, and this work is difficult, risky, and costly. So-called
“technology transfer funds” help fill this gap, but those funds appear still too rare in the
EU.
2. Funding is important but it is not enough
Commercializing academic research is very difficult. It requires access to particular skills
(e.g., legal, managerial, technical), but also contacts with potential co-founders,
employees, industrial partners, and of course investors. Having an infrastructure in the
form of a program with specific milestones and go/no go decisions is also crucial. These
capabilities are crucial but they are generally underdeveloped in the European Union,
especially when compared to the US, Israel or Switzerland.
3. There is a need for further integration/harmonization
The process of commercialization might involve stakeholders in different EU countries.
For example, a technology developed in the Netherlands might benefit from the expertise
from Spanish or German investors. Yet, several workshop participants felt that there are
still too many barriers to cross-country collaboration.
4. It makes sense for different regions to specialize on different
technologies/industries
The commercialization of science is a very difficult endeavor. It requires the right
combination of scientists, entrepreneurs, and investors. Thus, it generally happens in
“hubs” in which people know one another and learn from each other’s mistakes. For
example, the US is a leader in the commercialization of science, but by far the majority
of the successes come from only two hubs: the San Francisco/Bay area and the Boston
area. Thus, to foster innovation, it is probably unproductive to spread resources too
widely from a geographic standpoint. Instead, it makes sense to build on existing
strengths to foster the emergence different area of expertise in different regions (i.e.,
“smart specialization”). Yet, such specialization must emerge bottom-up, it should not be
imposed top-down.
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8 Conclusion
The commercialization of academic science is crucial for the development of a dynamic
high technology ecosystem in the EU. Yet, the continent is generally lagging behind its
competitors in this respect, and most new technology giants emerge from other part of
the world. The workshop participants viewed this situation as an urgent problem that the
EU should work on solving.
The workshop was an opportunity to explore different avenues to increase the rate of
commercialization of academic science in the EU. The primary focus on the day was on
funding. Commercializing science is a very costly undertaking, and innovative startups in
Europe fail too often because they cannot attract the necessary capital. Other startups
turn to American or Chinese investors because they provide higher valuations than their
European counterparts. The problem is even more severe in Central and Eastern Europe
where funding for commercialization is very scarce.
The EU is involved in several initiatives to fill this funding gap, including the Capital
Market Union, the European Investment Fund, and the European Innovat ion Council.
Those responses are important and useful, but they generally seem insufficient for three
reasons. First, the current amount of funding is still too low considering innovators’
needs, and in light of what is available in the US or in some parts of Asia. Second, other
bottlenecks exist beyond funding—such as the availability of expertise and the lack of a
general infrastructure to accompany would-be entrepreneurs. Third, European initiatives
are fragmented and the lack of integration complicates cross-border collaborations.
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